Two Worlds of Pension Reform in Western Europe

Abstract

The European pension policy landscape is generally depicted as a major building site, where governments are scaling back the pension systems they have inherited from the postwar years in order to adapt them to population aging. Europe is often seen as a graying continent that will have to face the effects of a demographic time bomb and that needs to reduce its pension commitments radically. As a matter of fact, in the last decade pension policy has gained unprecedented levels of prominence in the political arena throughout western Europe, and several countries have cut pension schemes. This image reflects some broad trends, but a closer analysis of pension policy in western Europe reveals a number of other important developments. Pension systems are not simply being adapted to population aging but are responding to at least two additional sets of pressures: the new career profiles that have emerged with the transition to a postindustrial labor market structure and highly integrated international financial markets. Current pension systems were designed in a time characterized by stable labor markets and limited cross-border capital mobility. Changes in these two areas, as well as in the demographic composition of societies, create economic and political pressures to rethink part of their structure. European pension systems are exposed to these pressures in broadly similar ways. However, the way in which they respond to them varies considerably across countries and is to a very large extent shaped by the institutional structure of the pension systems that are currently in place. Population aging, labor market changes, and stronger financial market integration generate different political demands and policy responses depending on whether countries have a pension system based on the social insurance model, where one single public pension scheme provides the bulk of retirement income to the whole resident population, or a multipillar system, where the state takes responsibility only for basic income security and additional coverage is provided by occupational and private arrangements. European pension systems are path-dependent; micromechanisms link existing institutional structures to new policies.' In particular, policymakers face different incentive structures and political pressures under different pension institutional settings. Empirically, pension